New tax report shows the burden in 34 countries around the world

by Ray Clancy on May 26, 2011

Tax regimes increase throughout the globe

People living in the Netherlands, Spain and Iceland saw their tax and social security payments increase the most in 2010 while those in Denmark, Greece, Germany and Hungary experienced the biggest drops, a new report shows.

The annual Taxing report from the Organisation for Economic Co-operation and Development (OECD) shows that tax burdens rose in 22 of the 34 countries it covers. It calculates the average tax wedge for each country from income taxes plus employee and employer social security contributions minus cash transfers as a percentage of total labour costs.

France, Belgium and Italy are the highest tax countries for one earner married couples with two children earning an average wage, with tax wedges of 42.1% in France, 39.6% in Belgium and 37.2% in Italy.

At the bottom end of the scale, New Zealand had the smallest tax wedge for the same family at -1.1%, followed by Chile at 6.2%, Switzerland with 8.3% and Luxembourg at 11.2%. The average for OECD countries was 24.8%.

Belgium, France and Germany had the highest tax wedges for single workers without children on average wages, at 55.4%, 49.3% and 49.1% respectively, though the tax wedge decreased by nearly 2% in Germany in 2010.

At the other end of the scale, the tax wedge in Chile and Mexico for single workers without children on average wages was only 7% and 15.5%, respectively. In New Zealand, the figure was 16.9% and in Korea it was 19.8%. The average for OECD countries was 34.9%.

In Hungary, lower employer social security charges and especially income taxes led to a 6.7% reduction in the tax wedge for a single person on the average wage, while in Germany, a cut in income taxes led to a 1.8% reduction. In Denmark, lower income taxes and a new green check to compensate for increased environmental taxes have led to a 1.2% reduction in the tax wedge.

In the Netherlands, increased employee social security charges led to a 1.2% increase in the tax wedge. Higher income taxes resulted in a 1.4% increase in the tax wedge for single taxpayers at average earnings in Spain, while an increase in employer social security charges and income taxes in Iceland resulted in a 3.3% point increase in the tax wedge.

Ireland increased income taxes and the health levy while it decreased child benefits. The impact of these reforms on the tax wedge has been partly offset by the decrease in the average wage. Because of the progressivity of tax regimes, lower earnings mean that a smaller share is taken in tax. This was also the case in Greece, where the strong decrease in the average wage resulted in a decrease in the tax wedge for all families, despite of the increase in marginal income tax rates at higher income levels.

Australia, Chile, Iceland, Israel, Italy, Mexico, the Netherlands, Norway, Poland, the Slovak Republic and Switzerland put large additional burdens on employment costs through compulsory payments which are not regarded as tax, since they are not paid to government, but to privately managed pension funds or insurance companies. Often, these are paid by the employer, but in Chile, Iceland, Israel, the Netherlands, Poland and Switzerland a large proportion is paid by employees.

On average across the OECD, tax burdens fell across all income levels, particularly due to personal income tax cuts; some countries have also decreased employer social security contributions. On average, tax cuts implemented over this period favour households with children most, and lower earners more than higher earners.

These trends were most marked in Australia, Ireland, New Zealand and Sweden. The biggest exceptions were Greece, Iceland, Japan, Korea and Mexico. The OECD finds that governments that had room for tax cuts over the past decade have generally sought to ensure that working families benefit, particularly those on lower pay and/ or with children. Notwithstanding the recession, there is no sign of this trend being reversed in 2010.